G8 summit: German union’s pay deal bypasses austerity

EUROPE’S most powerful trade union, IG Metall of Germany, last night blew a hole through the austerity measures dictated by chancellor Angela Merkel by winning the biggest rise in wages in two decades for workers.

The union says it will boost consumption in Europe’s biggest economy and help towards adjusting the regional imbalances that have caused tensions within the eurozone.

The deal is a remarkable achievement for a trade union dismissed as irrelevant a decade ago – and proof of the value of constant representation of the unions at board level in companies large and small.

It includes a 4.3 per cent wage rise for the sector’s 3.6 million workers. IG Metall initially sought a 6.5 per cent rise, but union chief Berthold Huber lauded the agreement, valid until May 2013, as a “good result for workers that avoids further strikes in the sector”.

German unions have pointed to strong economic growth and workers’ wage restraint in recent years as the reason for their demand for big increases this year.

The deal struck by IG Metall is of great importance for Germany’s economy because it often serves as a template for other industrial sectors. IG Metall represents most of the car workers in Germany, the industrial workers, engineering and ship- building employees.

Analysts said the pay rise will further strengthen domestic demand in Germany and thus have a broader significance for the continent. Europe is only avoiding a recession amid its prolonged debt crisis thanks to robust growth in Germany.

Mrs Merkel’s conservative government advocates cutting deficits across Europe and rejects calls to spur growth through significant new stimulus measures. Germany’s economy has traditionally been powered by exports but has been helped lately by increasingly strong domestic demand, ensuring that it remains what German officials have called “Europe’s growth engine”.

“The IG Metall pay deal is another clear sign that the era of very moderate wage increases is over,” said Joerg Kraemer, chief economist at Commerzbank, adding that German unit labour costs will rise in excess of the eurozone average.

“This helps the peripheral countries to regain the loss in price competitiveness they had suffered relative to the eurozone between the introduction of the euro and the burst of the debt bubble. But the eurozone as a whole gets weaker when Germany loses price competitiveness.”

More money in the wallets of Germans should, in theory, boost demand for imports from European partners. Economists believe higher labour costs in Germany could, over time, make products manufactured elsewhere in Europe more competitive relative to those made here.

“This is good news for Germany, good news for Europe,” said analyst Holger Messing. “This is not a story of greedy unions but of fair pay which should reflect well across Europe.”